August 19th, 2022
Dutch residents who work outside of the Netherlands in a capacity of board member/ statutory director of a non-Dutch resident company are covered by the director’s article in the tax treaties the Netherlands have concluded, in order to prevent double taxation of their remuneration.
In most treaties, directors’ remunerations are under a credit method to prevent double taxation.
In 2008, the State Secretary approved the use of the (more favorable) exemption method rather than the credit method for directors, providing certain conditions were met:
– The remuneration must be subject to taxation in the foreign country; and
– The tax rate of such remunerations is not more favorable rather than the tax rating of employee salaries.
If these conditions are met, directors are free to apply the exemption method; even so if a treaty prescribes the credit method.
This changes as of January 1, 2023; directors will no longer be able to claim the exemption method unless specifically granted in the applicable tax treaty (as in the treaties with Luxembourg, Singapore and Spain).
Exemption method and credit method
The Credit method allows the foreign tax to be offset against the Dutch owed income tax on worldwide income. This method of taxation leads to a final tax due at the same level as income form Dutch source only, since only the income tax on income that is taxed outside of the Netherlands can be credited against the income tax due.
For the Exemption method the actual paid tax in the foreign country is irrelevant; calculation of the exempted income will be done pro rata. In this respect, the sum of exempted tax in the Netherlands shall be calculated as: foreign income divided by world income times the income tax in the Netherlands that would have been pad without exemption. Finally, this shall be subtracted from the income tax in the Netherlands.
Consequences for all concerning
Due to withdrawal of the exemption method, the directors are held to use the credit method to prevent their remuneration is taxed double. Should the Dutch tax rate be higher than the foreign tax rate, then the effective tax rate for the managing and supervisory directors will increase due to this legal change as the tax rate when using the credit method shall always be at least equal to the tax rate in the Netherlands.
If you work as a managing or supervisory director as a resident of the Netherlands, for an entity outside of the Netherlands, then it might be wise to review your tax position. In this respect, we at BROADSTREET would be happy to advise you on the consequences of this legal change for you and the measures that should be taken.